Bond Markets and Prices
Bond Markets Defined
Although individual countries in Europe still have domestic bond markets where governments, sub-sovereign entities and corporations in residence issue bonds, and individual investors participate, the European bond markets are increasingly acting like a single market. The website, will enable you to learn more about bonds and investing in the various types of bonds and bond markets in Europe.
European bond markets can be broadly categorised in bond market sectors: government, sub-sovereign, corporate and mortgage-backed or asset-backed collateralised bonds. Within each market sector you will find bonds with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each bond offers its own balance of risk and reward and your choice of which bonds to invest in will depend on your investment goals, your risk tolerance, and financial considerations. Individual investors are likely to focus largely on participation in the secondary bond markets, which is where bonds are traded once they are issued in the primary markets.
Below are descriptions of different bond markets. To look at various Bond Market at a Glance pages containing price information and other helpful data on Investinginbonds.org, select one of the categories on the list to the left.
Additional bond price information is available at:
- AFME Credit Price Discovery & Market Data Guide The aim of the guide is to provide investors and other interested parties with an overview of the range of providers of price and market data currently available in the European government bond market. The guide focuses on the different platforms, voice brokers and data vendors.The goal is to provide the end investor with a basic orientation, to help simplify the process of finding the right data provider.
- Xtrakter's Retail Investor Bond Information Service The service is provided by Xtrakter Limited based on data derived from TRAX, an Over the Counter trade matching, regulatory reporting and information services system. The information on this website gives average closing bid and offer quotes, high, low and median prices for bond trades reported to TRAX. Average daily volume data is shown two months in arrears.
- TLX S.p.A. , which organizes and manages markets for the trading of financial instruments aimed at the investment needs of non-professional investors, including setting the rules governing market function, providing information on various types of bonds and company information and setting requirements for admission of financial instruments.
The European and Global Bond Markets
Globalisation and the rise of multiple types of European bond markets including a European corporate bond market have changed the opportunities for European bond investors--and everyone else.
Although the US has traditionally dominated the world’s bond markets, bonds issued in the US now account for less than half –about 44%--of the global bond market volume. In Europe, bonds are about 2/3 of the total amount of securities outstanding in bonds and shares; in the US, the bond market is about the same size as the stock market. Historically fragmented, the bond markets of the world comprise a great variety of bond products with complex and different characteristics. About 60% of the European bond market is government bond debt, 29% is corporate, and 11% is asset-backed; in the US, the proportion of bonds issued by the corporate sector is much larger.
Bond markets are open to both institutional and individual investors, but there is much more participation generally by institutional investors than individual investors. European individual investors in bonds represent less than 5% of the direct investment in the European bond markets. The majority of bond market participants in Europe are institutional investors, such as pension funds, insurance companies and banks.
Direct holdings of bonds by individual investors nevertheless vary a lot in between European countries. In Italy, individual investor holdings of bonds comprise 20% or more (in 2004, average more than €12,000) of total financial holdings. In Germany, the equivalent percentage is between 10-15% (in 2004, some €5,800) and in other countries it will be typically lower than 5%; the lowest figure being that for the UK (just 1.5%). (In 2004, average British, Spanish and French individual investors held around €1,000 worth of bonds.)
In comparison in the US, individual holdings of bonds amount to circa 6.9% of total financial holdings. The US bond markets have significant participation by individual investors in the local municipal government bond market (sub-sovereign bonds) where about 20-25% of investor participants are individuals.
Where deposits and cash are excluded from total financial holdings to take into account only investment in financial products, the portion of bonds in Italian individual investor portfolios rises to 30.7% (against 2% for Britain and 7.9% for the US).
In Belgium, Germany and Italy, individual investors prefer to invest in bonds directly while in other European countries such investments take place primarily through funds.
The European Government Bond Markets
Government bonds are bonds that are issued by central governments. Governments issue bonds to borrow money to cover the gap between the amount they receive in taxes and the amount they spend; to re-fund existing debt; and/or to raise capital. Government bonds are usually considered the highest quality bonds in the market because they are backed by central governments (unless of course they are emerging market bonds where defaults are a serious risk in many cases). Most individual investors focus on buying and selling government bonds.
In Europe, Government Bonds are also called sovereign bonds. In the UK, Government Bonds are also called gilts; in France, OATs; in Germany, Bunds; in Italy, among other terms, BTPs. In the US, Government Bonds are also called US Treasuries or T-Bills.
Each government in Europe issues bonds and individual investors across Europe buy bonds in their country of residence, whether in Europe or abroad. But investors can also invest in government bonds issued outside their country of residence. With the development of the Euro currency, Euro-zone investors can also buy government bonds in other Euro-Zone countries without incurring additional currency risk (assuming they are bonds issued in those countries in Euros). At the same time, individual government bond issues need to be attractive to investors from different countries.
The Sub-Sovereign Bond Markets
The Sub-Sovereign Bond Market is defined first as any level of government below the national or central government, which includes regions, provinces, states, municipalities, etc. that issues bonds. In Europe, the sub-sovereign market is primarily one dominated by agencies and supranational institutions such as the World Bank, Kreditanstalt für Wiederaufbau (KfW) and the European Investment Bank (EIB). As European countries have increasingly become one market, the growth of the sub-sovereign bond market has been significant as well.
Growth in the number and amount of sub-sovereign entities issuing debt has been related to changes in the structure and function of government entities below the national or “sovereign” level. Re-examination and reorganisation of sources of revenue for sub-sovereign entities and access to capital for new infrastructure are important topics in Europe, as the European Union continues to expand and develop rule on what categories of sub sovereign government borrowing are included in the national debt ceilings and which are excluded. Although central governments in Europe have been more likely to issue bonds than sub-sovereign entities in Europe, sub-sovereign entity participation in the bond markets is expanding dramatically in part because effective government needs to finance day to day operations of public services and capital infrastructure investments in roads, hospitals, bridges, reservoirs and other infrastructure at the same time as sovereign governments have debt ceiling limits. Government and sub-sovereign bond markets thus exist side by side as different and serve as independent sources of financing for the national or central government as well as for the local governments.
The market for sub-sovereign bonds in Europe has less individual participation than in the US; individual investors in the US municipal bond market also enjoy significant tax advantages for their investments. However, there are certain countries in Europe such as Germany in which individual investors are more inclined to participate in the sub-sovereign debt market.
Some functions in the economy are not a central government’s direct responsibility, but the government needs and wants to develop and strengthen the way those fields function. The most common fields on which government focuses such attention are mortgage loans to strengthen affordable housing, loans to students for educational purposes, loans to farms or small businesses, etc. To finance these efforts, a central government may create something called a government agency and finance this quasi-government agency by issuing bonds. Since they are indirectly or directly guaranteed by the government, these bonds are called quasi-government or sub-sovereign or agency bonds. Such agencies can be publicly or privately owned. For example, the German government guarantees bonds issues by the agency Kreditanstalt für Wiederaufbau (KfW), which makes housing and small business development loans. The US government has a mixed strategy, guaranteeing some mortgage bonds (Ginnie Mae) and not others (Fannie Mae and Freddie Mac).
Supranational Institutions and the Sub-Sovereign Bond Markets
A supranational entity is formed by two or more central governments to promote economic development for the member countries. Supranational Institutions finance their activities by issuing bond debt and are usually considered part of the sub-sovereign debt market. Some well-known examples of supranational institutions are the World Bank, European Bank for Reconstruction and Development; European Investment Bank; Asian Development Bank, Inter-American Development Bank.
Supranational institutions sell their bonds on local markets of member countries and in the Eurobond market.
The Corporate Bond Markets
The corporate bond market sector is second largest after the government bond market sector. Nearly 30% of outstanding bonds in the global market are corporate bonds, according to Merrill Lynch. In Europe the corporate bond markets continue to grow and develop although recent market volatility has slowed growth.
Individual investors are less involved directly in the corporate bond market in Europe than in the US. At this time, more individual European investors invest in corporate bond funds and other collective investment vehicles than individual corporate bonds. Research on how some individual Europeans invest in bonds suggests that because most individual investment in bonds has heretofore been in the government bond markets, there is a need for investors to familiarise themselves with concepts of risk which relate to investments in corporate bond debt. The assessment of credit quality of corporate bond issuers is particularly important; investors, who may have only invested in government bonds previously, may need to strengthen their understanding of how credit quality and risk affects corporate bond investments.
The High-Yield Corporate Bond Market
There are two categories of corporate bonds for investors--investment-grade corporate bonds and speculative-grade (also known as high-yield or the investor might hear the word “junk”). Speculative-grade bonds are issued by corporations that are perceived to have a lower level of credit quality compared to more highly rated, investment-grade, corporate issues. Speculative-grade refers to the fact that originally banks were not allowed to invest in bonds beyond the four investment grade ratings because the bonds were too speculative, too risky. The speculative-grade category has six levels of ratings.
Organisations that issue high-yield debt include many different types of corporations; newer companies; companies in particularly difficult economic sectors; companies engaged in financing leveraged buyouts; small companies undergoing a buyout, merger or restructuring; “fallen angels”, which are corporations which formerly had investment grade ratings but fell on hard times and “rising stars” which are emerging or start-up companies that have not yet achieved the operational history, the size or the capital strength required to receive an investment-grade rating, but turn to the bond market to obtain seed capital.
The high-yield corporate bond market has grown rapidly, in part because these securities help meet the needs of a diverse array of investors.
The Collateralised Debt Markets (Securitisation, Structured Products and Covered Bonds)
Collateralised debt has been one of the fastest developing investment vehicles in the last decade based on the idea that credit can be advanced on the basis of whatever collateral, security, or compensation in the case of default a borrower can use to repay the loan. The collateralised debt instrument is therefore a kind of promissory note backed by collateral, security or whatever other compensation in the event of a default that a borrower has. The collateral or security can come from one or more sources such as mortgages or loans or bonds/debt or asset-backed securities.
The speed at which this concept spread through Europe at the turn of the 21st century has created a significant European market in these complex bond products. This is largely an institutional bond market, because the products are very complex in structure and size and difficult for a non professional individual investor to understand.
The collateralised debt market has been the one most severely hit by turbulence since the summer of 2007, and so is undergoing changes. Because of this turbulence and because of the inherent complexity of collateralised bonds, it is extremely important that individual investors consult a financial advisor and/or take financial advice when considering an investment in these types of bonds.
Structured Products in the Collateralised Debt Markets
Many different types of products are “structured” to some extent. “Structuring” usually refers to any type of obligation that is not a straightforward secured or unsecured government or corporate obligation. Although these types of transactions are usually issued through special purpose vehicles, this is not always the case. For example, securitisations are one type of structured product. Another type of structured product refers to a packaging or repackaging of bonds together with various types of interest rate swaps and/or credit derivatives to change the interest and principal payment stream, in order to provide an investor with a particular risk profile that they want. For example, a government bond could be placed into an SPV or Special Purpose Vehicle—a subsidiary company entity which is used to isolate financial risk. Then the fixed rate on that government bond could be converted to a floating rate--or alternatively to a rate based on changes in a certain fixed income, or even equity, index. These types of structured products can be either reissued out of an SPV or Special Purpose Vehicle, or be directly issued by a bank or non-bank. In some cases, these products are also called “structured credit” if they involve products with some type of corporate or asset-related credit risks.
Securitisations, structured products and structured credit can be relatively simple in structure or very complex Due to the complexity of structured products, they are rarely part of traditional retail investor portfolios or fund offerings.
Covered Bonds in the Collateralised Debt Markets
Covered bonds are debt issued by banks that are fully collateralised by residential or commercial mortgage loans or by loans to public sector institutions. Covered bonds typically have the highest credit ratings, with most, but not all having AAA ratings. The notes offer an additional protection to bondholders than asset-backed debt because in addition to looking at the collateral pool as an ultimate source of repayment, the issuing bank is also liable for repayment, although in some cases the rating of the covered bonds is based more on the collateral than on the rating of the bank. If the issuing bank is downgraded, then the covered bond may also be downgraded but this depends on the specific situation.
Covered bonds are the second largest segment of the European bond market after government bonds. Germany, which created covered bonds known as Pfandbriefe to finance public works projects in 1770, leads issuance in the European covered bond market. Twenty four other European countries issue covered bonds to finance their mortgage markets and the most significant are Denmark’s realkreditobligationer at 16% segment of its market; France’s obligations foncières at 7%; Spain’s cedulas hipotecarias at 9% and Sweden’s säkerställda obligationers at 5%.
There are two types of covered bonds—those covered bonds that are subject to relevant national legislation, and also covered bonds that are not subject to national legislation, which are called “structured covered bonds.” As the covered bond world grows in importance, certain covered bond frameworks have been combined with techniques borrowed from securitisation. For those countries with covered bond laws, each different country’s covered bond laws regulate what assets are eligible to back covered bonds, the minimum quality requirements for the assets, and how investors will be protected if the issuing bank goes bankrupt. The national legislation does not say that the relevant government will guarantee repayment of the bonds, but rather the legislation stipulates how the collateral framework must operate. All countries with covered bond laws now allow for bonds backed by mortgages.
Domestic or National Bond Markets and International Bond Markets
The global bond markets can be categorised as “domestic” or national (including government/sovereign) bond markets and the international bond markets. The domestic bond markets are composed of all the bonds that are issued in each country by governmental, sub-sovereign, agency or building society bodies and corporations that are located in the country where the bonds are traded.
The international bond market comprises the Eurobond market and the foreign bond market. The Eurobond market comprises bonds denominated in a currency other than that of the country in which they are issued. The foreign market comprises bonds that are issued by foreign borrowers, i.e. those entities which do not “reside” in the country in which the bonds are issued. Regulators make distinctions between and among resident and non resident issuers and may have different requirements for issuance, selling, restrictions, taxing, and disclosure, etc.
The name Eurobonds can be misleading because from the word, you’d think either Eurobonds were about the European bond markets, or about the European currency, Euros. Eurobonds are actually bonds that are denominated in a currency other than that of the country in which they are issued. They are usually issued in more than one country of issue and traded across international financial centres. Supranational organisations and corporations are major issuers in the Eurobond market. Supranational organisations (such as the World Bank or the European Bank for Reconstruction and Development) use such bond issues for financing the development of emerging markets or to support developing countries. Corporations, including banks and multinational entities issue Eurobonds for many purposes including financing for capital and other projects. Eurobonds are not regulated by the country of the currency in which they are denominated. The Eurobond market is largely a wholesale, institutional market with bonds held by large institutions.
Foreign Bond Markets
Foreign bonds are denominated in the currency of the country in which a non resident or foreign issuer actually issues the bond. These bonds trade similarly to other bonds in the domestic market in which they are issued. For example, Bulldog bonds are sterling denominated bonds issued in the UK by a non-UK issuer. Yankee bonds are dollar denominated bonds issued in the US by a non-US issuer. Rembrandt bonds are issued in the Netherlands; Matador bonds in Spain, etc.
The most important country for foreign bond issues has been the US dollar market.
Emerging Market Bonds
Emerging markets are defined as those nations with economies which are developing. Among those considered emerging markets are some countries in Africa, Asia, Latin America, Middle East, Russia, and eastern/southern Europe. Emerging market bonds usually include government (or “sovereign”) bonds; sub-sovereign bonds and corporate bonds. Domestic emerging market bonds—those issued within an emerging market country—make up about ¾ of the amount of debt in the emerging market bond markets but because it can be difficult for a variety of reasons to trade in domestic emerging bonds, emerging market bonds held by foreign investors are usually foreign or external emerging market bonds. The majority of external emerging market bonds are government bonds.
The emerging market bond market is a global market. Although in the 1980s the emerging market bond market was comprised mostly of struggling economies, the global emerging market bond market now contains a diverse range of emerging market economy bond debt which is rated from investment grade to speculative grade. The percentage of investment grade bond debt in this market, as measured by some key indices, now ranges from 25-50%.